John Wiley & Sons (JW.A) Stock Down Despite Q1 Earnings Beat

John Wiley & Sons Inc. JW.A posted solid first-quarter fiscal 2018 results, wherein both the top and bottom line improved year over year, alongside beating the Zacks Consensus Estimate. While sales marked its second straight surprise, this was John Wiley & Sons’ fourth consecutive quarter of positive earnings surprise. To top it all, management announced a dividend hike, reflecting its commitment toward shareholders. But, guess what?

Despite the robust performance, shares of the company dropped 2.7% on Sep 7. Well, it looks like investors were let down by the year-over-year decline in constant currency adjusted earnings per share. Also, management reaffirmed its not so impressive outlook for fiscal 2018, which could be another reason that hurt investors’ sentiment. Yesterday’s shortfall took the company’s one month performance to a fall of 3.9%, wider than the industry’s decline of 1.4%.



Q1 in Detail

John Wiley & Sons delivered adjusted earnings of 59 cents per share that beat the Zacks Consensus Estimate of 53 cents and also increased 9.3% year over year. On a constant currency (cc) basis, adjusted earnings descended 5% year over year on account of a decline in adjusted operating income (on a cc basis). Including one-time charges, the company reported earnings of 16 cents compared with 53 cents in the prior-year quarter.

Further, revenues of $411.4 million climbed about 2% year over year (up 1% on a cc basis) and also outpaced the Zacks Consensus Estimate of nearly $400 million. Results were primarily backed by gains from Atypon’s buyout. Management further stated that strength in the Research and Solutions divisions compensated for the softness in the Publishing division that stemmed from lower print book sales.

Adjusted operating income inched higher by 2.1% to $42.8 million. However, the same plunged 13% on a cc basis, owing to some one-time gains in the year-ago period. Further, cost of sales increased 1%, while operating and administrative expenses escalated 3%, on a cc basis. The adjusted operating margin jumped 10 basis points to 10.7%.

Segment Details

Research: The division’s adjusted revenues of $223.6 million increased 7.9% year over year, fueled by solid contributions from Atypon that was acquired in October 2016, and improved Open Access revenues. On a cc basis, revenues at this segment were up 6%. The segment’s adjusted contribution to profit was $66.3 million that increased 9.8% from last year. This was backed by enhanced revenues, partly negated by increased royalty costs and expenses related to Atypon.

Publishing: Revenues at the division tumbled 9.4% to $131.3 million (down 8% on cc basis) on account of soft demand as well as market-driven reduction in print products in the Education Publishing and STM and Professional Publishing categories. This was somewhat compensated by marked improvements in Test Preparation and Certification, and Course Workflow. Adjusted contribution to profit by the division slumped 19.4% to $15.9 million, accountable to dismal revenues and unfavorable timing of development and licensing expenses.

Solutions: Revenues increased 8.5% year over year to $56.5 million (up 9% on a cc basis), boosted by robust performance of Education Services and Assessment, partly countered by a dip in Corporate Learning. The division’s adjusted contribution to overall profit was nearly $0.8 million, up substantially from $0.1 million in the year-ago period. This was aided by higher revenues and enhanced operating efficiency.

Other Financial Details

John Wiley & Sons ended the quarter with cash and cash equivalents of $84.1 million, long-term debt of $551.6 million and shareholders’ equity of $1,009.2 million.

Notably, the company used nearly $81.8 million of cash for operating activities in first-quarter fiscal 2018. Further, the company reported free cash flow (net of Product Development expenses) of negative $117.8 million at the end of the quarter, compared with negative $165.5 million in the year-ago period. This improvement was backed by the favorable cash collection and payments timing. However, free cash flow for John Wiley & Sons is usually negative in the first half of the year, due to the timing of journal subscription collections.

Nevertheless, the Zacks Rank #3 (Hold) company bought back 265,158 shares for $14 million in the reported quarter, leaving nearly 3.5 million shares pending under the standing authorization. Moreover, in June, management announced a 3% hike in its quarterly cash dividend to 32 cents per share. This represented the company’s 24th annual hike in a row.

Outlook

The company remains on track with its efforts to provide better digital products and services to professionals, researchers and educators worldwide. The company is also undertaking plans to realign its cost structure; reinvest in particular areas with growth potential and efficiently allocating resources. These efforts are expected to bear fruit fiscal 2019 onwards. Incidentally, in the quarter under review, the company incurred $29 million as restructuring charges from its operational efficiency endeavors. Nonetheless, these are likely to generate gross run-rate savings of about $45 million from fiscal 2019.

Well, John Wiley & Sons reiterated its fiscal 2018 guidance. Both revenues and adjusted operating income (at cc) are expected to be nearly flat year over year. The company expects adjusted earnings (at cc) to be down by low-single digits. Currency translations are likely to have a positive impact on the company’s results.

Meanwhile, cash from operations is expected to increase to at least $350 million, in comparison with $315 million. Capital expenditure is anticipated to be slightly lower than the year-ago level of $148.3 million.

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